21 Business Loan Options

Accounts Receivable Loans — Probably one of the quickest and most widely used methods of secured lending is loans against accounts receivable. This is the major source of collateral for commercial finance companies. Many banks have recently entered into accounts receivable lending.

Commercial Finance Companies - Commercial finance companies usually work on a 3 to 6 point spread between their cost of money and what they loan to their customers. A commercial finance company’s two primary sources for money are from lines of credit through commercial banks and from long-term loans from institutions such as insurance companies.

Accounts Receivable Financing - On accounts receivable lending, a separate account is established with a commercial bank, whereby remittances from your customer are deposited in that account. The commercial finance company then has a simultaneous deposit to your regular account, less the amount of the daily interest. At no time will your customers be made aware of the fact that you have their accounts pledged for a receivables loan, but the principle of dominion under the Uniform Commercial Code requires that remittances be deposited in the control of the lender. Generally speaking, the record-keeping process for accounts receivable loans is not cumbersome and is usually based on a photocopy or carbon copy of your existing sales records.

Factoring -Line of credit without the limitations of a typical bank line of credit. The oldest way of loaning against receivables is called factoring. Technically, it is not a loan against the receivables because the factor actually purchases the receivables and in some cases there is no further recourse for lack of payment on the receivable. With Some Factoring services, the borrower is not responsible for collection of the receivables.

Sale-Leaseback - In lease purchase agreements, the property can be new or used. It is sold to a lease company who in turn leases it back to the original owner or the intended buyer. The lease purchase agreement can be used for the acquisition of equipment, real estate and entire businesses as part of acquisition financing. For example, if sufficient closing funds are not obtainable through normal borrowing methods, it is possible to sell the used equipment to a leasing company and then lease it back. This capital is then available to the original seller of the business

Floor Planning - Perhaps the best-known use of floor planning is with automobile and truck dealers. Floor planning is available with all types of distributors such as appliance dealers, industrial machine tools, air compressors and other standard items that have a rapid turnover. With floor planning, banks and occasionally finance companies finance the goods while they are on the dealers or distributors premises. The lender also tends to provide the time financing to the end customer when the goods are sold. The latter situation being the more profitable and attractive.

Unsecured Loans - Unsecured borrowing is usually the simplest, method of financing. Although commercial banks are not the only source of this type of financing, they tend to be the major source and prefer making unsecured loans to a going business. Unsecured loans are typically made to provide working capital to an established company or an individual through a commercial bank.

Working Capital Loan - Working capital loans are usually for the length of the selling season to a period of up to one year. For example, if a company needs working capital to finance merchandise being prepared for the Christmas season (i.e., a toy manufacturer) or for the summer season (i.e., a boat manufacturer), a loan would be made until the inventory is sold and the money collected. Unsecured working capital loans also typically require that they be paid off for a period of 30 to 60 days before they are re-established. By “resting” the loan for a period, you establish that the working capital loan is not part of the equity structure of the company. Bankers feel comfortable with this concept.

“Warehouse Loan” — ‘Warehouse loans” are similar to other types of inventory loans, which means that a lender will advance fluids against a portion of the goods in the warehouse. The turnover of inventory is an important consideration in making loans on warehouse inventory. Goods that have a wide market and high turnover can command a higher percent loan of their market value than those goods that are seasonal in nature and have a lower demand. When goods are placed in a public warehouse, a warehouse receipt can be obtained and this receipt can be used as collateral for inventory financing. In a similar situation, field warehousing with a warehouse lending company also can be accomplished. The lender has a warehouse and the goods are stored with them. They then loan money against the inventory that is kept in their field warehouse.

New and Used Equipment Loans - A non-working capital loan would be a loan on equipment. To secure the lender on an equipment loan, a lien is used. The lien used to collateralize the loan against fixed assets is called a Chattel Mortgage. A chattel is personal property, which can be moved about such as machinery and equipment as opposed to real property (land and building), which is fixed and permanent in place. The lender uses the Uniform Commercial Code financing papers to perfect his security interest by filing a financing document at the appropriate government office.

Collateral Loans - A company may be able to obtain bank loans on the basis of such collateral as chattel mortgages, stocks and bonds, real estate mortgages, and life insurance (up to the cash surrender value). Even with collateral, the bank will still give great weight to the company’s ability to repay. The bank may turn down the application, no matter how good the collateral, if there is no clear showing of ability to repay. The bank does not expect to liquidate the collateral unless forced to and then will probably not realize book value on a forced sale. The collateral affords the bank some security and a collateral loan is easier to obtain than a line of credit or unsecured loan for a new or risky business.

Endorsers, Co-Makers, and Guarantors — Borrowers often get other people to sign a note in order to bolster their own credit. These endorsers are contingently liable for the note they sign. If the borrower fails to pay up, the bank expects the endorser to make the note good. Sometimes, the endorser may be asked to pledge assets or securities that he owns. A co-maker is one who creates an obligation jointly with the borrower. In such cases, the bank can collect directly from either the maker or the co-maker. A guarantor is one who guarantees the payment of a note by signing a guaranty commitment. Sometimes, a manufacturer will act as guarantor for one of his customers.

Assignment Leases - The assigned lease as security is similar to the guarantee. It is used, for example, in some franchise situations. The bank lends the money on a building and takes a mortgage. Then, the lease, which the dealer and the parent franchise company work out, is assigned so that the bank automatically receives the rent payments. In this manner, the bank is guaranteed repayment of the loan.

Real Estate - Real estate is another form of collateral for long-term loans. When taking a real estate mortgage, the bank establishes:
(1) the location of the real estate,
(2) its physical condition,
(3) its foreclosure value, and
(4) the amount of insurance carried on the property.
Prior liens and encumbrances on title must also be cleared.

Interim Financing — This is simply a high-interest short-term loan to tide you over until you can get permanent long-term financing. It’s suited to the company that has a good competitive position and has met an opportunity to make a profitable business provided it can come up fast with a sizable sum of new money. It may also be suited where interest rates on long-term financing are high and the company expects that they will decline by the time the short-term loan matures. If you are in this position and are already using a full credit line at your bank you can get the necessary funds in one of two ways:

Installment Loans - Larger banks generally grant this type of loan. They are made for almost any productive purpose and may be granted for any period that the bank allows. Payments are made on a monthly basis. As the obligation is reduced, it may be refinanced at more advantageous rates. It can be tailored to seasonal requirements with heavy repayments in peak months and smaller payments in the off season.

Time-Purchase Loans - Special types of time-purchase loans are available to finance retailer and consumer purchase of automobiles, household equipment, boats, mobile homes, industrial and farm equipment, etc., and are made for varying periods of time, depending on the product. This category also includes accounts receivable financing, indirect collections, and factoring.

Inventory Loans — These are available if the merchandise or inventory can qualify as collateral. Requirements are stiff and loans are limited to certain classes of inventory.

Lines of Credit - After presenting your financial statement and loan request package to the bank the bank hopefully will establish that you have an open line of credit up to a specific amount, for example up to $100,000. Generally, this means the funds are available for the company to use for a period of one year up to the credit limit. They may use as little or as much of the line of credit at any tune during the year that they desire. In taking down on a line of credit, you (if this is an individual borrowing) or the company will have to sign a note. The notes are typically for 90 days. However, where a line of credit is tied to specific assets, such as inventory financing, as in the leasing of uniforms, the repayment period under the loan could be for periods of up to two years.

SBF Programs - Small Business is one of the fastest growing segments of North America's economy. Imaginative entrepreneurs with a drive and spirit are creating thousands of new jobs and new opportunities for our country’s future. The Canada Small business Financing (CSBF) and the US's SBLA Programs were created to help small businesses reach their potential by making it easier for them to get term business improvement loans to finance the purchase or improvement of fixed assets for new or expanded operations. Administered under the Canada Small Business Financing Act (CSBFA), the program is a joint initiative between the Government of Canada and private sector lenders.

Equipment Leasing — Virtually every business can benefit from leasing in one form or another. Also, just about any type of equipment can be leased nowadays, new or used. For this reason, more and more companies are opting to lease the equipment they need instead of purchasing it. In addition, many leasing companies will allow a company to lease up to $50,000 in equipment simply by filling out a one-page credit application. These deals can be completed in as little as three working days. Leasing itself is really nothing more than an alternate form of equipment financing where the lesser (owner) purchases the equipment from a vendor on behalf of the lessee (user). The lessee maintains possession and usage of the equipment provided he insures the equipment against theft or damage, and pays the lesser a monthly user fee. At the end of the lease, the lessee can purchase the equipment (usually for $1.00) or give it back to the lesser and begin a new lease, or simply walk away.